Alfonse D’Amato

Mr. D'AMATO

Mr. D'AMATO. It came directly from rule 175. It is the SEC's own definition of forward-looking statements.

Mr. D'AMATO. The Banking Committee made a policy decision to exclude from the safe harbor certain companies and certain transactions in which the incentives for making overly optimistic forward-looking statements might be present. It is important to note that the safe harbor does not apply to: First, statements about a company that within the past 3 years has been convicted of certain violations of the Federal securities laws. Second, statements made in an offering by a blank check company. These are companies that offer securities to the public, but which have no clear business plan and are therefore highly speculative. Third, statements made by an issuer of penny stock. These are companies that sell very low priced stock, often through brokers who use high pressure sales tactics. There have been significant problems of fraud in the sale of these securities in the past. Fourth, statements made in connection with a rollup transaction. These are transactions in which sponsors of limited partnerships attempt to combine many separate partnerships and rake off huge management fees. Congress passed legislation to address these abuses in 1990. We shouldn't allow these transactions to use the safe harbor. Five, statements made in connection with a going private transaction. These are transactions in which a company buys back its shares from its public shareholders. Often, it involves management of the company buying back the shares. Six, statements made in connection with the sale of mutual funds. Mutual funds simply should not be making projections. The SEC has a long series of rules governing mutual fund disclosure. Seven, statements made in connection with a tender offer also are excluded. These often are hotly contested takeover battles, and we have decided not to give them any safe harbor protection. Eight, statements made in connection with certain partnership offerings and direct participation programs. Very often, these are securities products put together in-house at a broker-dealer, and we think the temptation for making rosy performance projections may be too great in these cases. Nine, statements made in connection with ownership reports under 13(d) also are excluded. These are the reports required under law by anyone who purchases 5 percent or more of a company's securities. The law also requires that they state their plans with respect to the company. The committee decided these statements should not be protected under the safe harbor. Ten, finally, the safe harbor does not apply to forward-looking statements in the financial statements of a company. So, to answer your question, we excluded a long list of companies and transactions from the safe harbor, because we were concerned that, in these companies and in these transactions, there might be a temptation for companies to make rosy projections.

Mr. D'AMATO. That is true. The bill requires that there be a clear warning that actual results may differ materially from any projection, estimate, or description of future events.

Mr. D'AMATO

Mr. D'AMATO. Mr. President, what we are talking about now is what we call in legal jargon the scienter standard. It is not an easy one. It can be difficult to understand. And indeed it can open up an incredible loophole, one that we are attempting to deal with; that is, to permit people to make projections. And they must state--I can have that disclaimer--they must state this is a projection, this is a projection, and that it may not be accurate. I will get the exact verbiage. It may not be accurate. Whole classes of issuers are exempted, the penny stocks, the mergers and acquisitions. ``Refers clearly that such projections, estimates, or descriptions are forward-looking statements and the risk that the actual results may differ materially from such projections, estimates, or descriptions'' has to be included. Now, let us read the language, because I have heard this, and I have seen it written, too. It is inaccurate to describe this bill as giving a license to people to knowingly, with intent, defraud. It is just wrong. Here is the language in the bill. We modified it today because I thought there was one standard that might go above and beyond. The exemption from liability provided for in subsection A does not apply. It does not apply. In other words, you get no exemption. Then on page 114, line 4, it says: (c) Exclusions.--The exemption from liability provided for in subsection (a) does not apply to a forward-looking statement that is-- In other words, you get no exemption. (1) knowingly made with the expectation, purpose, and actual intent of misleading investors. So if you knowingly make a false statement, knowingly, with the purpose and actual intent of misleading [[Page S 9135]] investors, you are not protected. And that is as it should be. These are projections. Now, I have to ask the question, who knows what someone knows, what is knowledge to them? And once you have that, once you say, if you knowingly made this, all they have to do--the plaintiffs bar this particular group, very small group --is allege that you knowingly made a false statement. The burden now comes upon that person who has this complaint filed against them to prove that they did not. How do you prove it? How do you prove it? That is why we say, look, it has to be a little tougher. You cannot say, ``You knowingly made this. You knowingly made this, knowingly, with intent, with the purpose to mislead investors.'' It seems to me that that is pretty reasonable. If a person does that, then you should go after them and hold them. We do. They are not exempt. We get down to the issue of splitting legal hairs and opening the doors for this group of bandits. That is what they are, bandits, absolute bandits; this is the group that, you know, suggests that we make it easier to bring these kinds of suits. We do not want to make it easier to bring suits that have no merit, where people allege someone knowingly, falsely made these statements. All you have to do is allege someone made the statement. Bingo, we have not solved the problem. That brings us right back into court and brings us into the situation where a person gets sued for millions, and has to settle for millions of dollars and/or pay millions of dollars in legal fees against claims that would otherwise be worthless and should get no dollars. I have to tell you something; that we have sat back for far too long in dealing with this because it was really a very small and almost insignificant portion of the population that was affected. We did not see on a daily basis lawsuits being brought with no claim. We did not see where we had, for example, of 229 cases filed, 229 cases filed, 38 percent used the same repeat plaintiffs; 38 percent used the same cadre. In other words, they were professional plaintiffs. And I have to tell you why we may have cured that and said--by the way, they were paid bonuses. These people, for letting their names be used, got $15,000, $20,000, $25,000 for being professional plaintiffs. So when we talk about protecting the little guy, we are not protecting the little guy. What we are trying to do is put a stop to and really protect the investors who have their money invested in these small companies, who have the mutual funds, who have those pension funds, which represent trillions of dollars and truly represent millions of people. Give them an opportunity. Give them a say. And do not have their companies savaged by people who are only looking to take care of their own interests. And those are the buccaneering barristers, those lawyers. The term was coined, at least the first time I heard it, by Senator Dodd. He happens to be correct. They are sharks who are looking to eat whatever they can and the devil may care as it relates to the harm and the injury that they bring, in many cases, to good people simply by being able to allege that someone knowingly made a misleading statement. We say, no, you have to go a little further. Knowingly, and you have to show intent. Because who knows what ``knowingly'' is. Show me. You say: I allege you knew it. I say I did not know. But if one has to allege that you knew and you had intent, that is a little more difficult; is it not? I think people are entitled to that presumption. I do not think they should be subjected to these scurrilous lawsuits. And they have taken place. That is why we say ``knowingly, with intent,'' and that you deliberately did this to mislead investors. It is one thing to have people subjected to suits where there is intent to deliberately mislead, and it is another thing where people have made accidents and now are held to a standard whereby that was an accident and they say, ``You knew.'' You say, ``I did not know.'' You did and you actually made, if the fellow actually made the statement, he made the statement. Nobody can say he actually did not. So the word ``actually,'' that is nothing. They say you have knowledge, claim you have knowledge. Wait, I did not know that it was wrong. I got you in court because all I had to do is say that, well, you did. You had actual knowledge, and if you checked your papers, you would have found out that the projections you were making were off. Now I have him in under a claim of actual knowledge. Did he really have actual knowledge? No. But it is very easy to allege. And once you allege it, you have him in this revolving door, in the chain. What do his lawyers say to him? ``We can fight it. We may be able to win it.'' But you know what? You may stand to lose, if they get a judgment against you, tens of millions of dollars, and put the company--a startup company --out of business. Or if you are an accountant, yes, we can probably win it. But you can get hit pretty hard. Because you know, these people made this and you saw it and they dragged you in. I think that when you look at and read what we have put in, not what somebody puts in substitution, tell me how you can read this bill and say, anybody, that we say that you can deliberately lie and mislead with intent, and that we give you safe harbor for that? We do not. I want to do it, and I will sit down and read once more, there is no exemption from liability where, line 7, a forward looking statement is: (1) knowingly made with the expectation, purpose, and actual intent of misleading investors. They are not protected. You can be sued. And if that is the case, you should be sued, no doubt; absolutely. There is nothing that keeps the SEC from doing this, from bringing these suits. Our bill does not protect fraudulent statements or conduct. The administration does not say that it does. It does not say that it does. A letter, from Abner Mikva, counsel to the President, asked for clarification. I do not think that our bill is unclear on this point. I can clarify it. If it is, this debate should provide important guidance that the bill does not and will not protect fraud. I think this is clarification enough. How many times should we state it? We do not do it, we will not do it, that is not my intent, and I urge my colleagues to oppose the amendment by my distinguished colleague and friend from Maryland. Mr. SARBANES addressed the Chair.

Mr. D'AMATO

Mr. D'AMATO. Mr. President, I would like to inquire of my colleagues if any of them have any statements to make with respect to the pending amendment, and how much time they intend to take. Might I ask my colleague how long he believes he will take?

Mr. D'AMATO. Mr. President, I ask unanimous consent that after the Senator from Colorado makes his statement that I be recognized--it is my intent to make a motion to table. Does the Senator wish to claim time to respond?

Mr. D'AMATO. That is fine. I ask unanimous consent that after the statement of the Senator from Colorado, which will take 10 minutes equally divided, at that point in time I will ask for the yeas and nays and make a motion to table.

Mr. D'AMATO

Mr. D'AMATO. I do not believe the yeas and nays have been ordered.

Mr. D'AMATO. I request the yeas and nays.

Mr. D'AMATO. As relates to the Boxer amendment, have the yeas and nays have been ordered?

Mr. D'AMATO. I request the yeas and nays.

Mr. D'AMATO. May I inquire? I did not know if the Senator from California wanted to use her 1 minute now.

Mr. D'AMATO

Mr. D'AMATO. It appears there are five amendments.

Mr. D'AMATO. Mr. President, this is admittedly incomplete, but let me just share some statistics from one law firm in New York between 1990 and 1992. One plaintiff was a plaintiff in 14 cases--14. The second plaintiff was in 10; the third fellow, 7; another fellow, 7; another fellow, 7. I will not mention the names of these plaintiffs, because I want to be respectful and not embarrass them. But, I should mention their names, because I am sure these plaintiffs are not legitimately aggrieved. It is incredible. I would like to find out how many shares they owned in each of these firms--I bet not more than one owns more than 10 shares. These plaintiffs buy shares in multiple companies so the firm can be designated lead counsel, and then the plaintiffs get paid a bonus. That is the kind of practice we have had taking place. I do not think we should keep this door open for 5 years for these lawyers to find supposed frauds so they can bring these kinds of cases. That is why I have to oppose this amendment. Do I want to hurt those who truly have been hurt? Absolutely not. When I see one plaintiff in 14 cases in 3 years, and another plaintiff in 10, and 1, 2, 3, 4, 5, 6 others who have been involved in a multiplicity of cases during this same period, I say it is time to change things. I yield the floor.

Mr. D'AMATO. Mr. President, I further ask, following the two stacked votes at 10:15, Senator Sarbanes be recognized to offer an amendment relative to safe harbor.

Mr. D'AMATO. Mr. President, I further ask that at 9:15 on Tuesday, the Senate resume consideration of S. 240, and that there be time for 30 minutes of debate on the Bryan amendment to be equally divided in the usual form, and following that debate there will be 30 minutes for debate on the Boxer amendment, to be equally divided in the usual form.

Mr. D'AMATO. Mr. President, I ask unanimous consent that at the hour of 10:15 on Tuesday, the Senate proceed to vote on or in relation to the Bryan amendment, to be followed immediately by a vote on or in relation to the Boxer amendment, with 2 minutes prior to the second vote for Senator Boxer in the usual form, to set forth an explanation, 1 minute on each side.

Mr. D'AMATO. Mr. President, I would like to propound a number of unanimous consent agreements which we have worked out in order to accommodate Members and in order to move the legislative flow. I ask unanimous consent that Senator Bryan be recognized to offer an amendment relative to aiding and abetting on which there will be 1 hour for debate to be equally divided in the usual form, and any second- degree amendments may be limited to half that debate time, and must be relevant in the first degree they propose to amend.

Mr. D'AMATO. Mr. President, I move to reconsider the vote by which the amendment was rejected.

Mr. D'AMATO. Of course, as it is clearly stated in the S. 240 the Securities and Exchange Commission, still has the ability to go after those for their intentional wrongdoing.

Mr. D'AMATO. Will the Senator yield for a question?

Mr. D'AMATO. Mr. President, this amendment is really another attempt to knock out one of the most meaningful provisions of S. 240 and double the amount that defendants would have to pay if there was an insolvent codefendant. The basis upon which we attempt to give some relief is to say, yes, for some small investors, if they have under $200,000 and a 10 percent cap. What we are doing here is just knocking it aside. We have to stop people going after people just because they have deep pockets, just because they have lots of money. And so I urge my colleagues to vote no.

Mr. D'AMATO

Mr. D'AMATO. Mr. President, if I might?

Mr. D'AMATO. Mr. President, I find it interesting that we talk about preserving the system to help the little people. Let me tell you something. What is actually taking place is the small investors are being used, and they are not representatives of any class. The only class they are representatives of is the greed and avarice of the attorneys who are milking the system and are spending the millions of dollars they make from the settlements right now. The lawyers are financing the public interest groups, which are lobbying to keep this system. It is the lawyers protection act to enrich themselves. That is what this amendment is. Let us look at the lead plaintiffs, the big law firms in New York and California that are manufacturing most of these cases. Who do they have? Steven Cooperman was named in 14 cases between 1990 and 1993. Is he the little guy who got bilked out of $10,000? How many shares does he own in how many companies? He is a hired gun. And who is he going to select to be his lawyer? I will tell you what he has done 14 times; 14 times he has decided between 1990 and 1993 to take the same firm. Sheldon Shore, 10 times, same firm. Mr. Shore, do you think he really represents the working people? I bet he did not even know there was a suit until he got a call because his name is in a computer and that stock dropped 6 points, and then he gets right on in there and he brings a suit. Now, that is not what the legal system is supposed to be about. Do you want to go through them again? Rodney Shields, seven; David Steinberg, seven; William Steiner, six; Ronald Kassover, five. We are talking about just a small handful of people who have been involved in suits multiple times in 3 years. It is a racket. It is not the little homeowner. It is not the pensioner investing for his retirement. So what do we try to do? We try to say let us stop the race to the courthouse by a bunch of quick scam artists. Let us see to it that the people who have a real stake, if there are some shenanigans going on, let us see to it that the small investor with a real stake is given control over the suit. This legislation protects the small investor by creating a rebuttable presumption that the person who has the largest financial stake should lead the case. And who do you think we are talking about? You think we are talking about an investment banking firm? A securities firm? No. My colleagues say they have knowledge of securities areas, in fact some of them have worked in securities. If you worked in the securities area, do you know that 51 percent of all of the funds that are invested are by institutional investors? And guess what? Half of that, $5.5 billion is in pension funds--pension funds. Those are the little guys. They have every nickel and dime they have earned for their retirement in there, and I think those pension fund managers, the institutional investors should be consulted when lawsuits are brought. And if they have a position in a company and they have invested hundreds of millions and they represent tens of thousands, hundreds of thousands of small investors, I want them to lead the case and I do not want Mr. Cooperman and the other guys over there picking the class. You better believe I wish to change it. I am sick and tired of having a system that rips off the American people so a handful of lawyers can get rich. They do not give two hoots and a holler about the small investor. Let us stop them from taking over the lawsuits. Do not come in here telling us that with this legislation we are trying to protect the fat cats. I want a system where if there is an institutional investor, and they have got some losses, that they have an opportunity to come to the Court, and by a rebuttable presumption they have an opportunity to be picked as lead counsel. Now, let me ask you, the only time that you have all the plaintiffs line up and agree on the lawyer is when these seven or eight plaintiffs race in to the courtroom at the same time--and they all say to the judge: Guess what, we all want the same law firm. Is that fairness? S. 240 creates a rebuttable presumption that the Court should look at the size of the financial interest, by the way, all the other standards under the Federal code of procedures. They still have to meet any challenges, but the lawyer who represents the pension fund should at least be given that presumption that they are the best counsel to keep the interests of the small investor. And by the way, if everyone agrees--and it would seem to me that all the small investors would want to be represented by somebody who would have a stake in the case. I want true plaintiffs, and if it is that person who has lost their life savings of $25,000, they are certainly going to want that pension manager who has a real stake on behalf of tens of thousands of similar people to be there to be supervising, to be watching. I look at this legislation, and I see that the amendment that is crafted talks more about the lawyers--the plaintiffs counsel. It says the judge should consider the work done to develop and prosecute the case. We are talking about 90 days in which this has been filed when the judge is going to have to make a decision. I would like to know what work is done by a plaintiff within 90 days. The judge should also consider the quality of the claim, prior experience representing the classes and possible conflicting interest. This is the lawyers protection amendment. This is not a class action amendment. This is not an amendment designed to see to it that the little guy is really represented. This is to continue the same kind of charade as exists now. And as well-intentioned as my colleague might be--and I believe she is very well intentioned--I believe that what this amendment will do is just allow another way for the entrepenurial lawyer to get around the door and race to the courthouse to stake his claim and keep control of the case--not on behalf of the truly aggrieved but on behalf of the fat law firms who want to get fatter. There are only a handful of these firms, but that handful has been a plague, that handful has kept the securities industry from doing what it does best, which is to provide capital for jobs, provide creativity, let firms experiment, let them go forward, let them do what they can do best without being unduly harassed. For those who break the law, for those who commit fraud, we have kept a strong SEC presence at every turn. We have provided that those who truly commit fraud will have no way out, whether it be through the so- called aiding and abetting, although, if you knowingly commit, you are not an aider and abettor, you are a perpetrator under this act and will be held liable. I yield the floor. Mrs. BOXER addressed the Chair.

Mr. D'AMATO. Mr. President, the hour is growing late and I do not intend to use all of my time. Let me first make an observation that the person or entity who has the greatest financial interest, does not necessarily mean rich people. It does not mean that we want a fat cat. Indeed, if we are talking about someone who is acting as a manager, we are talking about a class of people who, for the most part, are exactly the people who I would presume my colleague from California is interested in protecting, those people who have lost their entire investment portfolio, their 401 K., or their IRA. They are the people who I am concerned about. Now, this amendment, if passed would knock out one of the most critical provisions of S. 240. We call it the most adequate plaintiff. Who is the most adequate plaintiff for the class? One of the areas of abuse which was pointed out time and time again was the strike suit lawyers who file these class actions by racing to the courthouse to file a complaint and using a whole host of professional plaintiffs to file the lawsuit. I have to believe that the lawyer will continue to encourage that. Right now, an entrepreneur lawyer can draft a complaint, select one of his many ready prepared plaintiffs, and I have read the list, and race off to the courthouse to file the complaint. Nine out of ten times the first lawyer who arrives at the courthouse with the complaints in hand will be chosen to represent the rest of the class. This is the lucrative race that lawyers stand to make between 30 to 35 percent of multimillion dollar coerced settlements. Do we want to continue that or do we want to stop that practice? Nine out of ten times the so-called named plaintiff has no idea that the suit has been filed. My colleague has not put any provisions in her amendment that will stop that race. We have. We have. The professional plaintiff has no idea what is in that complaint, never mind pretending that this is the type of lead plaintiff who actually is aggrieved. They are not aggrieved. They have been working in cahoots with a cast of characters who are defrauding the public. This is not the way our legal system should work. Plaintiffs who have been harmed, or have been defrauded should be able to file lawsuits to recover damages. Professional plaintiffs should not be allowed to clog up this system. S. 240 contains a provision to take care of these pernicious problems. It attempts to allow institutional investors who account for 51 percent of the market and who manage $4.5 trillion of pension funds to serve as lead plaintiffs. Maybe they have not served in this capacity before because they have not had a chance, because they have not been fast enough to race into the courthouse and they only read about the lawsuits after they are filed and lead counsel has been appointed. Make no mistake about it, and it is not the intention of my colleague to bring this about, but this amendment will help perpetuate this system--the race to the courthouse. By giving institutional investors an opportunity to more fully control and be involved in litigation, the class will have meaningful representation. We will have an institutional representative who represents hundreds of thousands of aggrieved parties control the case instead of someone who is looking for a quick buck and who is not helping the class but is helping himself. The members of the class can only wonder what happened when they get a check for 22 cents in the mail. I will tell you what happened, the lawyer made $8 million and the class got 22 cents. Now, that is not right, but that is what is going on. Now, what about the selection of a person who has a great financial interest or who represents the class that has the largest financial interest through a pension fund, an institutional investor. We say there will be a presumption, a rebuttable resumption, and if there is no deficiency, the court will choose the counsel who represents the largest financial interest to lead the class. If they do not meet the standards pursuant to the Federal rules of civil procedure, they will not be able to serve as lead plaintiffs. There are a number of those provisions. Although the hour is late I will read a few of those Federal procedures. Prerequisites to a Class Action. One or more members of a class may sue or be sued as representative parties on behalf of all only if, first, the class is so numerous that joinder of all members is impractical; second, there are questions of law or fact common to the class; third, the claims of defenses of the representative parties are typical of the claims of defense of the class, and fourth, the representative parties will fairly and adequately protect the interest of the class. That is called for in law. The amendment offered today seeks to change the standard for selecting lead plaintiff. This amendment provides for those seeking to serve as lead plaintiff to decide unanimously who should serve as lead plaintiff. If there is no unanimous agreement, the court will pick the lead plaintiff based on certain factors. Those factors have nothing to do with the class. They are incredible. They talk about how many times you brought class action suits, what the legal work to date has been. It says ``financial interest in the relief sought,'' and after that, it is just a critique of lawyers who have brought these actions. I cannot understand why we would put these considerations in--for the people to be chosen as the plaintiffs. I say this, because this was probably drafted by LeFrac and Company.